Britain should be preparing to make the most of the euro break-up

The week when Alex Salmond firmed up the details of the coming referendum in
Scotland about breaking up the UK was a strange time for the Prime Minister
to be singing the praises of the UK's monetary union and berating the
eurozone as structurally flawed.

'It isn't only that the monetary union is flawed; these countries do not properly belong together in a monetary union at all'Photo: Reuters

But he was right. I don't think, though, that he has drawn the right conclusions about the euro.

Throughout the eurozone the accent remains on austerity. This sounds right, not least because it mirrors what is open to us all as individuals. And it sounds morally right as well. We overspent, got ourselves into a nasty pickle and therefore what we need now is a good dose of hardship.

Although this analysis is misguided, for some countries it leads to the right prescription. They are in such a dangerous fiscal position that the markets could easily lose confidence. They need fiscal austerity – although the size and pace of retrenchment is debatable. Meanwhile, heavy private sector indebtedness may constrain private spending. This is our position.

But not all countries are like this. In Germany, personal sector borrowing is extremely low. Yet the German response to all economic difficulties, regardless of type, seems to be that we must all make painful structural changes and cut back. This approach reminds me of those doctors who, when you visit them about an ingrowing toenail, tell you to drink less and lose weight.

The Germans do not seem to recognise that there is such a thing as aggregate demand and that you can have too little of it. They are sustained in this delusion because, when they generate too little of it themselves, they use someone else's by running a substantial export surplus. Yet, as a matter of arithmetic, not all countries can do this.

I had my own exposure to these attitudes last week in a set-to on the radio with a German professor. He hailed the recent increase in German consumer spending as a renaissance. Yet it amounts to annual growth of barely 1.5pc after a decade of hardly any growth at all. These German professors really must get out more.

His reply to my criticism of "the austerity union" was that my views were just "simple Keynesianism". I felt deeply flattered. Amid all the confused and unnecessary detail, I aspire to be simple. As for Keynesianism, I have long believed that, paraphrasing Dorothy Parker, you can never be too rich, too slim or too Keynesian. This is particularly apposite when the Western world is facing a chronic lack of demand of the sort for which Keynes and his ism were born to explain and overcome. The eurozone has turned out the way it has because it is the expression of erroneous thinking about economics and a clash of incompatibles about politics. It isn't only that the monetary union is flawed; these countries do not properly belong together in a monetary union at all.

To save it, can we really expect the Germans to change the habits of a lifetime? Can we expect the German government, bursting with self-righteousness, to admit that Germany is part of the problem? This is all the less likely because German resentment at southern over-spending, fecklessness and non-payment of taxes is surely understandable. Yet, without the euro, things would be different. The German currency would rise on the exchanges, so deterring people (including Germans) from buying their stuff and encouraging them to buy other people's. The negative effect on German GDP would create pressure to expand domestic demand, if not through fiscal policy then through reform e.g. of restrictions on credit availability.

Lee Kwan Yew's autobiography recounts how Harold Macmillan told the Commonwealth prime ministers in 1962 that Britain had to turn its back on their countries and integrate with Europe because in modern times vigorous economic growth only came if you were part of a big continental bloc. That momentous judgment, made after so little thought and blessed with so little foresight, but shared by much of the establishment, has cost us dear. We must not make a similar mistake again. We should not be seeking to shore up the eurozone but rather, without gratuitously offending our European partners, we should be preparing to make the most of its welcome break-up.

Last week the world's elite descended on Davos for their annual talkfest. It has become a joke that the views of Davos man invariably turn out to be wrong. This year he was intensely gloomy, apparently based on the view that the politicians won't do what it takes to stave off the disaster of a euro break-up. Perhaps Davos man was wrong about the politicians? I doubt it. He was wrong in not realising that the looming "problem" is in fact a key part of the solution.